FASB Proposes CECL Extension – What’s the True Impact?
As you may have read or heard, the Financial Accounting Standard Board (FASB) has proposed extending the Update 2016-13 (or CECL) effective date for non-public business entities (PBEs) to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. While at first this proposed extension may seem to offer a full year of additional relief for many private banks and credit unions, the true impact falls short of that expectation. While it’s true that, as presently drafted, the transition and effective date requirements of CECL require non-PBE’s to adopt the amendments for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, the important fact to note is that both non-SEC filer PBEs and non-PBEs alike are still required to adjust retained earnings for the cumulative effect of these amendments as of January 1, 2021, for calendar year-end entities. In other words, without this proposed change, these institutions would have to adopt CECL on their call reports for the “annual period” of 2021 to meet the Q4 reporting date. To accomplish this, interim statements would have to be produced throughout the initial fiscal year, causing two calculations to be made: one at the end of Q4 2021 and one in Q1 2022. This would result in a large provision expense for a year sitting in one quarter. Consequently, the amendments effectively negate the benefit of providing non-PBEs with an extra year before implementing the guidance, contrary to the Board’s stated original intent to provide non-PBE’s with more time than their non-SEC PBE counterparts to develop and implement systems and controls to calculate a CECL allowance.
Accordingly, in an effort to clarify its original intent and eliminate the awkwardness of the interim statements, not necessarily to provide more time, the FASB has proposed to amend the transition guidance such that the amendments would be effective for non-PBE’s for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. That is, calendar year-end non-PBE’s would be required to adopt CECL and adjust their opening retained earning balance on March 31, 2022 (as of January 1, 2022), instead of the initial reporting date of December 31, 2021 (as of January 1, 2021) – recognizing a true net impact of only 90 additional days to report reserve levels in accordance with the standard.
As a next step to ratify the proposed extension, the FASB directed its staff to draft a proposed update for vote by written ballot with a 30-day comment period.
With all that said, the question often being asked today is how to best leverage the extension being offered? Should we simply put on the CECL brakes and send a “thank you” card to the FASB for the newly found time? Of course not! Embrace this suggested relief period as an additional opportunity to prepare, to run parallel calculations to incurred loss calculations, and further calibrate CECL modeling/methodologies.
On a recent “Ask the Regulators” webcast, Shayne Kuhaneck, an assistant director at FASB, stated, “I travel around to quite a few different venues, speaking to a pretty broad swath of stakeholders. The consistent message is that data continues to be challenging, and so I would recommend not slowing down and I would recommend continuing to collect that data and if you haven’t started, to start, to see where your gap is. While you have the extra time, I think it’s a perfect opportunity to keep moving forward with your plans.”